Auditing Standards in China—A Comparative Analysis with Relevant International Standards and Guidelines

The continuing and deepening economic reforms in China have brought many changes both socially and economically to the society. The primary function of auditing in China has begun to shift away from the traditional tax compliance assessment towards the credibility lending to financial statements. The economic reforms and the development of the Accounting Standards for Business Enterprises have necessitated the parallel development of auditing standards in China. While some significant differences exist, the new Chinese auditing standards are, in a number of important aspects, similar to the professional standards promulgated by the International Federation of Accountants. The development of a comprehensive body of standards, auditor independence, the role of certain auditing techniques, and certified public accountant (CPA) population are the major areas that China needs to improve. Opening up the Chinese accounting industry will trigger significant advances in the implementation of Chinese standards and the development of the Chinese accounting profession.     

THE SUBSTANCE OF ACCOUNTING FOR PUBLIC‐PRIVATE PARTNERSHIPS

This article evaluates Public‐Private Partnerships (PPP) accounting practice and the related financial accounting and reporting requirements. Governments across the world are seeking to access private finance to improve public infrastructure. Accounting for PPPs has encountered many difficulties, one of which is the practice by which PPPs are not accounted for as fixed assets on the balance sheet of either the public sector client or the private sector operator. Accounting for PPPs has grown in importance at a time of transition from national Generally Accepted Accounting Practice (GAAP) to International Financial Reporting Standards (IFRS). Under UK GAAP, both client and operator accounting adopt the reasoning – familiar from leasing standards – of the allocation of risks and rewards between the parties to determine the party which should recognize the fixed asset on its balance sheet. The gap in IFRS with regard to operator accounting has been filled by the interpretation IFRIC 12 on service concession agreements: this moves the reasoning from risks and rewards to control, familiar from consolidation standards. The UK Treasury and the International Public Sector Accounting Standards Board (IPSASB) have required/proposed the adoption of the mirror‐image treatment of IFRIC 12. In most, but not all, cases, control will be assessed to rest with the client, which will recognize property, plant and equipment, and not with the operator, which will recognize either a financial asset or an intangible asset on the basis of an assessment of which party bears the majority of risks and rewards. Under both UK GAAP and IFRS, accounting policy choices are strongly influenced by, for the client, governmental control frameworks, and for the operator, by the implications for the profile of distributable profits and for taxation. An important public policy issue is that the national accounts, which for European Union member states must comply with European System of Accounts 1995, will remain on a risks and rewards basis. It is these numbers that will be used in assessments of macro‐fiscal policy and fiscal risks, notwithstanding that the Eurostat version of risks and rewards is even more open to manipulation than were the national financial reporting standards.     

国外环境财务会计发展评述

针对全球气候变化、CO2排放、资产弃置及土壤污染等一系列环境问题,各国会计准则委员会、国际机构及会计协会纷纷开展对环境财务会计的准则研究和实务推广。本文简要回顾了国外环境财务会计的发展历程,介绍了欧美、日本等西方发达国家在环境财务会计指南及实务上取得的最新研究进展,以期为我国环境财务会计准则体系构建提供借鉴。     

Can information confusion caused by the financing model of new economy companies be eliminated?

New economy companies often use convertible and redeemable preferred shares with equity and debt characteristics as financing tools to reduce risk during their early stages of growth. According to relevant accounting standards, such preferred shares should be classified as financial liabilities and measured at fair value, with changes in fair value recognized in profit or loss. This can lead to confusing financial information: the better a company’s development prospects, the higher its redemption or conversion price and loss, which can result in a large negative net asset value. A successful initial public offering, however, could offset large losses and negative net asset value. Following the development of accounting standards, this article thoroughly analyzes various proposals to modify relevant accounting standards and eliminate confusing information. This article also proposes possible problems and solutions as a reference for accounting standard setters and the various stakeholders in new economy companies.     

Accounting for varieties of capitalism: The case against a single set of global accounting standards

This paper argues that the optimal design of accounting standards may depend on the institutional characteristics of the political and economic system. There are several varieties of capitalism, and it is not obvious which of these varieties is best. Moreover, the existence of different varieties of capitalism arguably promotes economic progress. This being the case the paper urges a cautious approach to the imposition of a single set of global accounting standards for all companies. The forced adoption of single form of accounting runs the risk of severely restricting the different forms of capitalism that can develop. It also privileges one particular way of doing business over alternative forms that currently exist or, more importantly, may exist in the future. In effect the forced adoption of a single form of accounting can be viewed as a form of restrictive practice that prevents alternative and superior ways of doing business from taking shape. International accounting standards optimised for stock market based capitalism are not necessarily optimal for other forms of capitalism and, since stock market capitalism has lost credibility as a way of doing business, the world may be better served by encouraging alternative forms of capitalism to develop with accounting standards tailored to their needs.     

The Conceptual Framework as a Coherent System for the Development of Accounting Standards

The Financial Accounting Standards Board (FASB) visualized a conceptual accounting framework as a 'coherent system of interrelated objectives and fundamentals that can lead to consistent standards that prescribes the nature, function, and limits of financial accounting and financial statements' (FASB, 1976). To Australian standard setters, the primary purpose of the conceptual framework (CF) was only to be used as a 'guide' in developing and reviewing accounting standards (AASB, 1995, para. 5). The International Accounting Standards Committee (IASC) diminished the role of a conceptual framework even further by openly acknowledging that some standards are inconsistent with the guidelines offered by the framework (IASC, 1989 para. 12). Even though the Australian Accounting Standards Board (AASB) supposedly pursues a policy of harmonization of conceptual frameworks and accounting standards, there are also acknowledged inconsistencies in the conceptual frameworks of the IASC.
The aim of this article is to assess the coherence of the Australian (and IASC) conceptual framework. This analysis identifies confusion in drafting or construction of the conceptual framework, internal inconsistencies, and inconsistency with the legal framework within which business entities operate. Accordingly it is suggested that the adoption of a conceptual framework will not lead to consistent accounting standards, and inevitably the conceptual framework will lack credibility so long as it is inconsistent with legislation.     

国外财务报告目的资产重估研究综述

企业新会计准则中引入公允价值计价，使得基于财务报告目的资产重估这一问题变得逐渐重要。本文通过对国外财务报告目的资产重估这一问题制度背景的分析，从资产重估的动因和价值相关性进行研究综述，试图为我国新企业会计准则的运用提供新的研究思路。     

Do principles‐based accounting standards lead to biased financial reporting? An Australian experiment

International accounting standards are deliberately designed to be principles‐based (i.e. ‘substance over form’). With Australia's recent adoption of international accounting standards, a relevant question is, do principles‐based accounting standards lead to biased financial reporting? The present paper describes a study that analysed the consolidation judgements of senior accounting officials from Australian listed companies. Participants made consolidation judgements based on AASB 1024 Consolidated Accounts. Although AASB 1024 is not identical to IAS 27 Consolidated and Separate Financial Statements, there are many similarities and both follow a principles‐based approach. In aggregate, the present study finds that principles‐based accounting standards do not necessarily lead to biased financial reporting.     

Interpretation and application of “new” and “complex” international financial reporting standards in Fiji: Implications for convergence of accounting standards

This study extends prior research on accounting judgment and decision making research by examining the effects of ‘new’ and ‘complex’ accounting standards on judgments of professional accountants. It examines whether there are differences in judgments of professional accountants in Fiji when interpreting and applying selected International Financial Reporting Standards (IFRSs). A significant within-country difference in judgments of professional accountants has serious implications for convergence of accounting standards. The results show that interpretation and application of accounting standards are affected by complexity of the accounting standard and professional accountant's familiarity with the standard. The study also finds strong support for an interactive effect of familiarity with the accounting standards and complexity in accounting standards on judgments of professional accountants. Furthermore, the results show that differences in judgments exist between the Big 4 and non-Big 4 professional accountants when provided with new accounting standards that require complex judgments. The results of this study are of interest to stakeholders at a time when IFRSs are increasingly being adopted throughout the world and standard setters are struggling to promote compliance with those standards.     

Great Expectations: Public Perceptions Of The Auditor's Role

The professional accounting bodies in Australia have undertaken a study of the "expectation gap" in perceptions of the auditing role and concluded that the public's image of the auditing profession will be enhanced if the differences in attitudes can be minimised. This paper analyses the views of auditors and financial report users about what the role of the auditor and the nature of an audit should be. The most significant differences between the auditors and the user groups relate to whether the auditor should be responsible for preventing and detecting fraud, detecting illegal acts, reporting whether the company is a reliable debtor or loan prospect and reporting the degree of confidence he or she has that the correct audit opinion has been issued. Where the differences represent "deficient standards" or "unreasonable expectations", the professional bodies should consider changing auditor responsibilities or attempting to change users' attitudes.     

Market Transparency and the Accounting Regime

We model the interaction of financial market transparency and different accounting regimes. This paper provides a theoretical rationale for the recently proposed shift in accounting standards from historic cost accounting to marking to market. The paper shows that marking to market can provide investors with an early warning mechanism while historical cost gives management a “veil” under which they can potentially mask a firm's true economic performance. The model provides new explanations for several empirical findings and has some novel implications. We show that greater opacity in financial markets leads to more frequent and more severe crashes in asset prices (under a historic‐cost‐accounting regime). Moreover, our model indicates that historic cost accounting can make the financial market more rather than less volatile, which runs counter to conventional wisdom. The mechanism shown in the model also sheds light on the cause of many financial scandals in recent years.     

Professional accountants and the development of a management accounting service for the small firm: barriers and possibilities

This paper reports the results of a qualitative study examining the potential for the provision of a management accounting service for smaller companies by accountants in professional practice. The study aimed to determine the management information needs of owner-managers, the type and frequency of information preferred and the capacity of professional accountants to contribute to these needs. The owner-managers of 15 smaller companies were asked to participate in semi-strucutured interviews during which their use of computers to provide management accounts, their relationship with their accountant and their financial skills were discussed. The respondents were presented with a range of management information including statutory final accounts, interim accounts, cash statements, ratios and graphical comparisons of monthly turnover figures in order to assess their financial information skills and needs. The study found that companies used computers for the preparation of management accounting information, but usually not to their full potential. The financial awareness of owner-managers varied considerably. There was a favourable response to the presentation of ratios and graphs, however, it was felt that an explanation or interpretation of financial information by their accountant would be a useful addition to improve their understanding and therefore aid their business. The study concludes that there appears to be significant potential for accountants to expand the management accounting services they provide to smaller companies, especially where information is presented as ratios or graphs and accompanied with an appropriate narrative interpretation. This would also increase the financial skills of their clients and result in an increased demand for management accounting services.     

Adverse effects of uniform written reporting standards on accounting practice,education, and research

When transactions have multiple attributes, achieving uniformity in their classification depends on whether similarities or dissimilarities are of interest; uniformity with respect to both is not possible. The pursuit of uniform written standards at the expense of social norms diminishes the effectiveness of financial reporting in stewardship and governance, and in keeping the security markets informed. A shift to written standards discourages thoughtful classroom discourse on alternatives which develop professional judgment. It also engenders ‘‘by the book” attitudes and drives talent away from accounting programs and, ultimately, from the accounting profession. Judgment and personal responsibility being the hallmarks of a learned profession, the dominance of uniform written standards weakens the claim that accounting programs belong in universities alongside architecture, dentistry, engineering, law, and medicine. Uniformity discourages research and debate in academic and practice forums and promotes increasingly detailed rule-making. It shuts the door on learning through experimentation, making it difficult to discover better ways of financial reporting through practice and comparison of alternatives. Improved financial reporting calls for a careful balance between written standards and unwritten social norms.     

The Reliability of Reported Profits and Asset Values, 1890–1914: Case Studies from the British Coal Industry

Considering the vital importance of coal to the British economy before 1914, it is clear that accounting practices in the coal industry during the late nineteenth and early twentieth centuries have received too little attention. There is a particular need for studies comparable to the work on railways and iron and steel which has examined conventions for accounting for capital expenditure. Such conventions create serious difficulties in the interpretation of reported profits and asset values for historians of any industry and may also have misled contemporaries. Evidence for the coal industry which has been examined up till now has indicated that standard practice comprised a modified form of the replacement accounting used by railway companies. This paper examines the extent to which this supposition is justified. It concentrates on the accounting policies of five important colliery companies and on the effects of these policies on profits and the book values of fixed assets. Two principal conclusions have emerged. The first is that, although replacement accounting was certainly widespread, accounting policies were more complex and more diverse than has hitherto been suggested. The second is that it is frequently impossible for the historian to determine whether balance sheet values are indicative of capital employed. Both profits and asset values were in most cases highly unreliable.     

会计职业判断绩效、影响因素及其校正

本文在借鉴已有会计职业判断和绩效研究成果的基础上，对会计职业判断绩效及其影响因素进行了比较深入的探讨。本文认为，会计职业判断绩效是判断结果与一定的标准相符的程度，它是会计人员、经济业务事项和会计环境的函数。现实生活中，正是由于职业判断本身的主观性和不确定性，致使职业判断成为上市公司盈余管理的重要手段。因此当前我国会计监管的重要任务之一就是要从会计人员、制度规范、中介机构和监管层等几个层面上对滥用会计职业判断，特别是在企业没有完成考核指标或为达到某种目的时，蓄意调整相关指标，提供虚假财务报告的行为进行综合治理，以“校正”会计职业判断绩效，提高会计信息的真实性和有用性。     

Lease transaction structuring,earnings management,and management credibility

Despite recent regulatory concerns regarding off-balance sheet financing, and concerns about lease accounting in particular, relatively little is known about how financial statement users view lease transaction structuring compared to other forms of earnings management. We examine sell-side financial statement analysts’ views on lease transaction structuring and its impact on their assessments of management credibility. Although operating leases often act as the prototypical example of transaction structuring, survey responses suggest that lease structuring and related voluntary reconciliations do not raise the same concerns for analysts as do other earnings management activities (which lower analysts’ perceptions of management credibility). Our findings are consistent with prior research demonstrating that, with precise accounting standards, managers are more likely to attempt earnings management by structuring transactions, but auditors are also less likely to adjust such attempts, and suggest that financial statement users may also be less concerned with transaction structuring than with other forms of earnings management.     

Should More Internally Generated Intangible Assets Be Recognized? A Commentary

This study analyzes whether financial statements should recognize more internally generated intangible assets with particular reference to China. This issue is significant because of the increasing importance of the ‘new economy’ and R&D investment, including in China. We present the current accounting requirements for intangible assets and illustrate that the failure to recognize internally generated intangible assets leads to a high ratio of unrecognized value to market capitalization, known as the asset light phenomenon among firms. We discuss and compare international and Chinese views supporting and opposing the recognition of more internally generated intangible assets. We identify and analyze the major issues in general, and in China particularly, that standard setters and their stakeholders have to consider if more internally generated intangible assets are recognized. We focus on areas of recognition, initial and subsequent measurement, and user reaction. We find that the most critical issues are the separability and measurability of internally generated intangible assets. Based on the issues identified, we discuss initiatives on non-financial disclosure in relation to unrecognized intangible assets and firms’ value creation. The study elucidates the consequences of current accounting standards on internally generated intangible assets and, by identifying the critical issues, contributes to the debate on whether it is best to adopt recognition of internally generated intangible assets or a disclosure-only approach.     

Using corporate social responsibility performance to evaluate financial disclosure credibility

Due to the paucity of immediate and direct information about financial disclosure credibility, it is often difficult for investors to assess the credibility of financial disclosures (e.g. whether reported earnings are biased). Given this situation, the present study proposes and finds that investors use additional cues, such as information about corporate social responsibility (CSR) performance, to form overall impressions about management's honesty, credibility, and trustworthiness. Similar to other findings in the halo effect literature, we find that these overall impressions subsequently influence both investors' assessments of financial disclosure credibility and the prices they are willing to pay for a company's stock. The findings support the theoretical framework on financial disclosure credibility by (1) showing that management credibility is an important tool that investors use to assess disclosure credibility and (2) suggesting that management credibility is a multidimensional latent construct for which CSR performance can be one of several relevant indicators.     

Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

With China’s adoption of principles-based international accounting standards and its convergence with International Accounting Standard 39 (IAS 39), Chinese companies have discretion under the original Accounting Standards for Enterprises 22 (CAS 22) as to how they account for the initial measurement, sale, and subsequent reclassification of financial assets. We use a Chinese company (‘Company A’) as a case study to illustrate how earnings are managed to exploit this discretion. We document that the company re-classifies its available for sale equity investments as long-term equity investments to decrease the volatility of the company’s apparent profits. We also make some predictions regarding how the company will handle its financial assets under the new standard, which is the same as IFRS 9. Our research contributes to the continuous improvement of China’s accounting standards and has implications for regulators of the capital market.     

Financial instruments,financial reporting,and financial stability

I review new empirical evidence from the recent financial crisis on the relation between financial reporting and financial stability. I draw the following conclusions: First, there is still no evidence that fair value accounting caused widespread fire sales of asset or contagion. Second, the empirical evidence suggests that accounting and regulation might have contributed to the crisis by allowing several banks to delay actions. Third, even if share prices reacted positively to the relaxation of fair value accounting rules during the crisis, the origin of the problem might be lax rules that allowed banks to run into financial and regulatory problems. Fourth, fair values can be relevant for assets that a bank intends to hold until maturity if that bank strongly relies on short-term financing. Fifth, the recognition of fair values is no substitute for information that allows investors to judge a bank's risk exposure and the validity of reported fair values.